Powell Industries, Inc. — Fiscal 2019 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019; filed May 8, 2019. Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems, with significant exposure to oil and gas, petrochemical, utility and transportation markets. The interim financial statements are unaudited.
Financial highlights
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Revenue | $123.7 million | $101.5 million | $233.1 million | $191.7 million |
| Gross profit | $20.1 million | $12.4 million | $34.7 million | $23.0 million |
| Gross margin | 16% | 12% | 15% | 12% |
| Operating income (loss) | $1.2 million | $(5.3) million | $(1.9) million | $(12.7) million |
| Net income (loss) | $1.0 million | $(3.3) million | $(1.7) million | $(9.0) million |
| Diluted earnings (loss) per share | $0.08 | $(0.29) | $(0.15) | $(0.78) |
- Quarterly revenue increased 22%, and six-month revenue increased 22%, primarily from higher domestic orders and improved oil and gas and petrochemical market conditions.
- Quarterly gross profit increased 62%; gross margin expanded approximately four percentage points to 16%, reflecting higher volume and manufacturing efficiencies.
- Quarterly SG&A increased 7% to $17.2 million, but declined to 14% of revenue from 16%. Six-month SG&A was $33.1 million, or 14% of revenue versus 17%.
- Quarterly income before tax was $1.4 million, compared with a $5.1 million loss in the prior-year quarter. The quarterly effective tax rate was 30%; the six-month effective rate was negative 11%, affected by foreign tax losses subject to a valuation allowance.
- Operating cash flow was $26.0 million for the six months, compared with cash used of $10.6 million in the prior-year period. Management attributed the improvement primarily to collections of accounts receivable and a $6.6 million income-tax refund.
- Capital expenditures were $2.0 million, while investing activities provided $5.3 million, primarily because short-term investment maturities exceeded purchases.
- Financing activities used $7.5 million, including $6.0 million of dividends and $0.4 million of debt repayment. The quarterly dividend was $0.26 per share; a further $0.26 dividend was declared on May 7, 2019.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $66.4 million, short-term investments were $6.0 million and total restricted cash was $18.6 million. Cash, cash equivalents and short-term investments totaled $72.4 million, compared with $49.8 million at September 30, 2018.
- Total assets were $413.6 million and stockholders’ equity was $292.3 million, compared with $430.0 million and $301.6 million, respectively, at September 30, 2018.
- Long-term debt, including current maturities, was $1.2 million, down from $1.6 million. There were no borrowings under the $75.0 million U.S. revolving credit facility.
- Letters of credit reduced revolver availability by $15.6 million; $59.4 million remained available for letters of credit, subject to cash-collateral requirements. Restricted cash of $18.6 million was pledged under the credit agreement.
- Current assets exceeded current liabilities by 2.4 times, and management reported debt to total capitalization of 0.41%.
- Outstanding surety bonds totaled $140.7 million, with $609.3 million of additional bonding capacity. Powell also had $3.8 million of bank guarantees outstanding under its U.K. facility.
Material changes and operating indicators
- Backlog increased to $397.2 million at March 31, 2019, from $260.9 million at September 30, 2018 and $322.0 million at December 31, 2018. Approximately $334.7 million was expected to be recognized within the following twelve months.
- Six-month new orders increased to $369.1 million from $241.4 million. Second-quarter new orders were $196.7 million versus $141.5 million in the prior-year quarter.
- Domestic revenue increased 36% in the quarter and 42% for the six months; international revenue decreased 12% and 24%, respectively.
- Commercial and industrial revenue increased 30% for the quarter and 33% for the six months, while utility revenue declined 11% and 18%, respectively, as selected large utility projects neared completion.
- Approximately 93% of revenue was recognized over time using cost-to-cost or similar methods, making results sensitive to project cost estimates, execution and contract modifications.
- Contract assets declined to $70.7 million from $82.5 million, while contract liabilities increased to $51.1 million from $43.2 million. Net contract assets declined to $19.6 million from $39.4 million.
- Powell adopted the new revenue recognition standard on October 1, 2018 using the modified retrospective method; no opening retained-earnings adjustment was required.
Outlook, commentary and risks
Management stated that improved customer investment in oil and gas and petrochemical projects had favorably affected orders, backlog, revenue and operating results, and anticipated that the improvement would continue through the remainder of Fiscal 2019. Management also said it would continue emphasizing cash preservation, production efficiency, cost alignment and investment in future business opportunities. No quantitative revenue or earnings guidance was provided.
- The business is cyclical and highly dependent on oil, gas and petrochemical capital spending, commodity prices, economic conditions and customer project schedules.
- Backlog may be canceled or modified and may not be a reliable indicator of future revenue or earnings. Fixed-price, percentage-of-completion contracts can create significant earnings volatility from cost estimates, change orders, claims, liquidated damages and project close-out activities.
- Raw-material price and availability fluctuations may compress margins because fixed-price contracts can limit Powell’s ability to pass through cost increases. The company did not have commodity-price hedges.
- International operations expose Powell to foreign-exchange risk. Accumulated other comprehensive loss increased to $24.1 million, primarily from Canadian dollar and British pound movements; the company did not hedge translation exposure.
- Legal proceedings, warranty obligations, performance guarantees, letters of credit and surety bonds create contingent exposures. Management believed existing litigation would not have a material adverse effect, but outcomes remain uncertain.
- Management reported compliance with the U.S. revolver and U.K. facility covenants, and stated that disclosure controls were effective with no material changes in internal control over financial reporting.
Investor verification points
- Verify whether backlog conversion, new orders and domestic market strength continue, particularly in oil and gas and petrochemical markets.
- Review gross-margin sustainability and the effect of contract-estimate revisions, project execution, warranty costs and raw-material inflation.
- Monitor operating cash flow, milestone billings, contract assets and liabilities, and the timing of collections as project volume increases.
- Confirm continued compliance with revolver covenants and the availability of cash collateral, letters of credit and surety bonding capacity.
- Assess exposure to oil and gas spending, commodity prices, foreign exchange, customer cancellations, fixed-price contract losses and contingent claims.
- Reconcile quarterly profitability with the six-month net loss and evaluate whether the reported improvement represents sustained operating performance or period-specific project timing and estimate changes.